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Is gold still valuable as a hedge against inflation?

4 Mins 28 Sep 2022 0 COMMENT

Traditionally gold is considered a hedge against inflation across the globe including in India. The yellow metal performs exceptionally well during times of economic turbulence in general and during periods of high inflation in particular. The question today is that is it still a hedge against inflation. In the recent past, the relationship of gold against other asset classes such as equities, currencies, and bonds has changed drastically. Due to changes in the performance of the economy, changes in the monetary and fiscal policies and many more reasons, all the asset classes are performing independently of each other. All these asset classes have their unique price action depending upon features such as supply demand, interest rate regime, inflation, gross domestic product etc., making them equally important for investors.

At present, the gold price in India is determined by the factors of international gold prices and exchange rates. Globally, gold was considered a hedge against inflation, however, it was not the same in the Indian context. In the older days, gold was considered very precious because of its store of value and non-availability of different ways of investment like what we see today.

Various ways to invest in gold

Physical gold:

As Indians, we love to own physical gold instead of in any other form. Hence, the demand for physical gold increases during festivals and marriage season. Further, owning gold and its ornaments is prestige for many of us. The only challenge of owning physical gold is that it does not fetch any interest apart from price appreciation or depreciation.

Derivatives market:

Since introduction of commodity futures trading in India in the year 2003, gold has bee part of the futures contract and it has been attracting investors attention because of its usage, knowledge about this product as well as attraction towards this commodity. In order to cater to different types of customers, the exchange has introduced 4 variants of futures trading in gold and they are:

  • Gold – 1 KG
  • Gold Mini – 100 Grams
  • Gold Guinea – 8 Grams
  • Gold Petals – 1 Gram

Until 2017, futures trading on gold was available for trading and on 17th October 2017, the commodity market regulator permitted for launch of options trading in gold futures. Initially, the options on gold 1 kg was introduced and later, it was introduced on gold mini also.

Gold ETF:

This is one of the popular ways of investing in gold without owning the physical gold and without having challenge of rolling over the contract upon expiry. This is most suitable for those investors who are looking for investing in gold for a longer period.

Sovereign Gold Bond:

As we all aware India is the second largest importer of gold in the world and importing around 800-900 tons per annum. This is a burden on the India’s exchequer in terms of balance of payment. In order to reduce India’s dependency on import and encourage investors to go for gold investment rather than buying, the Indian government launched Sovereign Gold Bond scheme where investors are allowed to invest in gold for a longer period i.e., 8-years, which is the lock in period. Further, investors are made attracted to this scheme by paying interest at the rate of 2.5% per annum payable half yearly.

The price movement of gold in all the above-mentioned ways is the same and it is largely impacted by the global economic conditions, inflation, interest rates, supply-demand as well as political stability.

In the year 2022, when the war between Russia and Ukraine started, gold prices made a knee-jerk movement by making a small upside movement, however, the upside move was not maintained for a long time. The war between the two countries is great economic turbulence, however, it failed to have a major impact on the bullion market as the market participants are equally looking at other asset classes.

Inflation has emerged as the main concern for investors since the beginning of 2022 with the U.S. consumer inflation rising to its decadal highest levels thereby prompting central banks to hike interest rates, which is detrimental to the gold market. When we compare the gold price versus the U.S. consumer inflation over the last 2-years, gold prices hit their all-time high in early 2020 mainly because of economic turbulence due to COVID, and at that time the inflation was near its lowest level. However, the trend changed subsequently and in 2022, when inflation was high gold prices reacted positively by rising near to their historic highs.

As the demand for other investment tools in gold as mentioned above increased, the demand for physical gold declining. This indicates that gold is considered another asset class to diversify the portfolio. In such a situation, sovereign gold bonds are outperforming other gold investments. Over and above the rise in metal price, the investor receives an additional 2.5% interest per year. The lack of fund management fees gives them an advantage over gold ETFs. Furthermore, if kept until maturity, there is no capital gains tax.


The traditional tag of Gold – Hedge Against Inflation is more reality in the present world. As we have seen from the last 2-years market action of gold against inflation, it does not have a correlation and gold prices are in a broad consolidation phase.  More than inflation, gold market is impacted by other economic factors such as interest rate, geopolitical tension, and central banks decision on interest rate. Availability of other options of gold investment creating the demand for gold as another investment tool.

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